A separate report from the Labor Department showed producer prices dropped an unexpected 0.6 percent in September. Analysts had anticipated prices would remain unchanged after rising 1.7 percent in August.

The housing numbers still look somewhat soft and that's a reflection of weakness in the consumer. The low PPI numbers mean that the Fed is in a position to keep rates unchanged for a while, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

U.S. stock futures, which were lifted earlier after strong quarterly results from bellwethers Apple and Caterpillar, trimmed their gains on the soft housing and price data.

New construction activity in the volatile multifamily segment dropped 15.2 percent to an annual pace of 89,000 units. Groundbreaking for single-family homes, the largest component of the housing market, rose 3.9 percent in September to an annual rate of 501,000 units.

Compared to September last year, housing starts were down 28.2 percent.

The housing market, the main catalyst of the worst U.S. recession since the 1930s, is crawling out of a three-year slump and residential investment probably contributed to economic growth in the third quarter, according to analysts.

New building permits, which give a sense of future home construction, unexpectedly fell 1.2 percent to an annual pace of 573,000 units in September, the Commerce Department said. That was the biggest percentage decline since April.

Analysts had forecast permits at 600,000 units. Building permits were down 28.9 percent compared to September last year.

A survey on Monday showed confidence among U.S. home builders edged down in October amid worries over the expiration of a $8,000 government tax credit for first-time buyers.

The incentive, which ends next month, has been widely cited as the main force behind the housing market's steady recovery.

Separately, prices paid at the farm and factory gate fell 4.8 percent on the year, which was steeper than forecasts for a 4.2 percent drop. Excluding food and energy, prices declined by 0.1 percent in September from the prior month, and were up 1.8 percent on the year.